India Eases Cash-Supply Curbs as Surging Yields Imperil Growth
India’s central bank announced plans to buy long-dated government bonds after a surge in yields imperiled economic growth, in a move that eases cash-supply curbs aimed at stemming a plunge in the rupee.
The Reserve Bank of India will conduct open-market debt purchases of 80 billion rupees ($1.3 billion) on Aug. 23 and “thereafter calibrate them both in terms of quantum and frequency” based on market conditions, it said in a statement yesterday. The earlier liquidity-tightening steps must not “harden longer term yields sharply” and hurt lending, it said.
India’s 10-year bond yield touched 9.48 percent yesterday, the highest since 2001, as the nation struggles to curb capital outflows spurred by risks such as a record current-account deficit and speculation the U.S. Federal Reserve could taper stimulus. The RBI since mid-July raised two interest rates and capped cash injections into the banking system to aid the rupee, steps that risk hurting expansion in Asia’s No 3 economy.
“The long-end yields reacted too much and that was, probably, not the objective,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “There are other objectives that the RBI has to worry about, like government borrowing costs and the impact on the economy.”
Government bonds eventually snapped a five-day drop at the close in Mumbai yesterday. The yield on the notes due May 2023 slid 32 basis points, or 0.32 percentage point, to 8.92 percent. The rupee weakened 0.2 percent to 63.23 per dollar and has tumbled about 14 percent in the past six months. The S&P BSE Sensex index slid for the third straight session.
Steps Reviewed
The central bank said a review of the measures since mid-July suggests the “immediate objective of raising the short-term interest rates has substantially been achieved.”
The issue of cash management bills will be calibrated going forward, “including scaling it down as may be necessary,” the RBI said.
The central bank last month increased both the marginal standing facility rate and the bank rate by 200 basis points to 10.25 percent. It has also tightened daily reserve requirements.
The interbank overnight lending rate has surged more than 300 basis points, or 3 percentage points, to 10.3 percent since the end of June.
The yield on the 10-year notes has jumped 1.46 percentage points in the same period, while that on the two-year securities rose 1.85 percentage points, according to data compiled by Bloomberg.
Trade Imbalance
The current-account gap widened to 4.8 percent of gross domestic product in the 12 months ended March. The Reserve Bank of India estimates the sustainable level is 2.5 percent of GDP.
The plunge in the rupee threatens to stoke the cost of imports such as oil, adding to price pressures.
Consumer prices rose 9.64 percent in July from a year earlier. Another gauge based on wholesale prices advanced 5.79 percent, a five-month high that exceeded the central bank’s comfort zone of about 5 percent.
India’s economy may expand 5.5 percent in the year through March 2014, compared with 5 percent in the previous 12-month period, the central bank estimates. That lags behind the 10-year average of about 8 percent.
The nation is suffering as Asia’s role as the world’s growth engine wanes and investors pull out billions of dollars.
Raghuram Rajan, the top adviser in the Finance Ministry since 2012 and a former International Monetary Fund chief economist, becomes the Reserve Bank governor in September. He succeeds Duvvuri Subbarao. The next scheduled monetary-policy review is on Sept. 18.
